The stand-off continues

The fiscal stand-off between Labour in Wales and the ConDem coalition in Westminster has always been about one thing. Labour wants to get borrowing powers, but does not want the responsibility of figuring out how to pay back the money it wants to borrow.

Labour in Wales has had an easy ride since the Assembly was established. Apart from some very limited control over non-domestic rates and council tax levels, it has only had to decide how to spend the money it has been given. For the first ten years, when there were large increases in public spending, it was easy to keep a lot of people relatively happy. And now, when there is rather less money to spend, they seem to be able to get away with pointing the finger at Westminster and saying it's all "their fault". Either way, they get to smell of roses and reap the rewards at the ballot box.

So the very last thing Labour in Wales wants is for that cozy arrangement to come to an end. They know that if they gain any meaningful control over taxes they will have to answer to voters not just for how wisely they spend money, but for the much more difficult question how much they have to spend ... for a good part of it will come from our wallets and purses in tax.


So today's announcement that the Welsh Government is going to be given limited borrowing powers is actually no more than spin. Nothing more is on the table than has been on the table for the last couple of years. But it is a very clever piece of spin. There's a world of difference between saying, "We won't give you borrowing powers ... because you need to be able to pay back what you borrow" and, "We will give you borrowing powers ... if and when you figure out how to pay the money back." It's always better to say a positive "Yes we will (if)" than a negative "No we won't (unless)" ... even though they are two ways of saying exactly the same thing.

This is going to leave Labour with a bit of a headache. I expect them to try and come up with a package of minor taxes and charges, but nothing that will have to be paid for directly by voters, because that will have an effect on how they vote. In particular they won't want to touch income tax. But without the big taxes, I'm not sure that will get anywhere near enough to pay for the investment that Wales desperately needs.


My advice to Labour is this. Accept the responsibility of being able to vary the rate of income tax, but make it conditional on being able to vary the rates of other taxes too, especially business taxes.

As I see it, the idea of being able to improve our economic performance by varying income tax but none of the other big taxes (which is in essence what the Calman Commission recommended for Scotland and what the Holtham Commission recommended for Wales) is fundamentally flawed. We can't have any real control over our economy with just that. It is like thinking we can drive a car using only the steering wheel, ignoring the fact that we also need to be able to use the accelerator and brakes, to change gear and, occasionally, to reverse.

The Treasury will be reluctant to give up their total control of these other big taxes to Wales, but up the ante. They have made you a conditional offer, so say yes, but make it conditional on having the ability to vary (even if only slightly) a wider range of the taxes that really matter. Don't be over-concerned about minor taxes. Aggregate tax, air passenger tax, landfill tax and the like are the equivalent of the switches that open the car windows or adjust the ventilation ... useful, but not enough to move our economy in the right direction.

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Anonymous said...

The way I see this is that the Con/Lib Dem coalition in London( whatever their myriad faults) are forcing Welsh Labour to face up to the realities of the powers that were accumulated in the Referendum:i.e ultimate financial accountability. That can only be a good thing. It's ironic that this pressure is coming from London rather than emanating from our own government here in Wales, but then, that says it all about Welsh Labour.

They will of course try to resist, but I think they will be really exposed on this issue. And who knows, the Silk Commission might just surprise us all, by calling for a portion of Welsh income tax to be retained in Wales( say 30%). Yes, that would mean that the block grant would also be reduced by an equivalent amount, but it would almost overnight lead to a big increase in the financial accountability of the Welsh Government,and also force more Welsh voters to pay more attention to what that government is doing with their money. More financial accountability and more democratic accountability. A Win-Win situation.

Anonymous said...


Do you mind not calling them 'Welsh Labour'. They are 'Labour in Wales'.

Anonymous said...

Agree with 09.03 and 09.22

Once Labour see there is a link between income and expenditure they won't be able to blame Tories all the time. With time it will also strengthen the Welsh economy. The problem is that Labour will see it as a chance to cut things they don't like (with some using the Welsh language as a stick) and continue to subsidise stuff which doesn't work for the economy but does for them - Communities First.

They will probably also do the same as Labour did in London - build the economy around housing and so will see a mad drive to increase housing along the North Coast and Newport as a commuter town to Bristol.

My experience of the Econ dept as the Assembly is that the civil servants are by and large, anti-Welsh (or unable/unwilling to see things from a Welsh perspective) and some are lazy.

In any case, Plaid's line should be that they don't want Wales to be whingers and want to have control over the whole budget and taxation so that we in Wales have no one but ourselves to blame if we are in a mess.

Anonymous said...

I wish I could share Anon 09:03's optimism. Labour does support having accountability over the small taxes and these will be devolved. They believe that would be enough revenue per year to finance borrowing, well within the expected limit the Treasury would set. These taxes account for about £300m per year (out of a block grant of roughly £15bn, albeit a shrinking one). Definitely an increase in accountability, but not a "big one" as you say, and certainly not a useful one.

If Silk recommends income tax it's a different game, and I guess that's what you're hinting at. Both Labour and the Tories believe there would have to be a referendum for income tax to be devolved.

The Treasury does not want Wales to have autonomy. It will only ever permit very limited borrowing- the simple reality is that the large-scale investment that Wales needs is incompatible with the UK's austerity agenda.

Both Labour and the UK Government will be extremely satisfied with yesterday's "deal" because for Labour's part it doesn't commit them to income tax, and for the UK Government it gives the illusion of progress.

The absence of Barnett from the "deal" also means there is a risk that any tax-varying powers will simply be impossible to use because taking the hit on tax revenue would be unaffordable.

Anonymous said...

And by doing as MH suggests, Labour in Wales could quite clearly out-manoevure the UK Government and also neutralise Plaid (if they haven't already). Offer to take accountability for income tax, in exchange for being given the other taxes too and a needs-based block grant to equate for whatever taxes aren't devolved. This would actually be a fair federal-style settlement giving a 50/50 mixture of accountability and fair treatment.

This is the card Wales should have played and is Plaid Cymru's policy. Of course Labour wouldn't accept it but they really should've played that card.

Anonymous said...

"In any case, Plaid's line should be that they don't want Wales to be whingers and want to have control over the whole budget and taxation so that we in Wales have no one but ourselves to blame if we are in a mess."

To an extent this is true, but you can only blame yourself if you have the levers to make decisions, not just the 'accountability'. Power has to go along with accountability.

A point made by David Melding is that Wales' current 'subsidies' from the Treasury are in fact more than deserved due to the historic contribution that we have made to the UK coffers in our previous natural resources boom. As a devolutionist or federalist argument this works well and this is what Plaid Cymru appears to have moved towards, even under Leanne Wood who is more open about independence than most.

I think there's a differene really, thinking about public expenditure and the unpopularity (and injustice) of cuts, between Plaid Cymru forming a Welsh government in the short-term, and proposing the end of Westminster funding in the long-term. My feeling is that there needs to be more up-front investment in Wales before an independent Wales is attractive to the electorate.

MH said...

I'm sure that the Tories and LibDems went into the negotiations saying that Labour had to accept the power to vary income tax, and that they would not be given borrowing powers without it. So in a sense Labour can claim a victory in that the specific requirement to accept income tax varying powers has been dropped in favour of a more general requirement.

As I said, Labour will probably try and lump together as many of the minor taxes as they can and borrow on that basis. They won't be able to borrow much, but if they add what they can borrow to the capital expenditure allowance already included in the block grant (it's a much-reduced sum, but still significant) and what they can get from elsewhere (primarily the EU) they could put together a "package" of capital investment that they would be able to trumpet as something special. It wouldn't be that special, of course, but they would simply say that it would be imprudent to borrow any more.

If they resolutely refuse to touch income tax, they might seek control over other taxes, particularly taxes on business. If they can tax business it means that most individual voters won't see the difference in their pockets, which is what Labour want. Or they might, which is what I'm suggesting, accept the power to vary income tax and business taxes but say that they have no intention of varying income tax, and would not do so unless it was specifically written into a future Labour manifesto. This would be a fairly neat way of addressing the fact that they had previously said they would not want the Welsh Government power to vary income tax without specific approval from the electorate.

Another possibility is that Labour would be very happy to have a referendum on income tax varying powers. Think about how they used the previous referendum on primary lawmaking powers. It was set up as an obstacle to prevent devolution anything else to Wales so that when they were asked to devolve say policing and justice, or energy, they could say, "Hold on, we have to do it one step at a time. We can't even consider other things until after this referendum."

Having a referendum on just one thing at a time is an effective way of "drip feeding" devolution in tiny drops. Labour know they can't stop further devolution, so their tactic for the last ten years or so has been to try and slow devolution down as much as possible.

Continued in next comment ...

MH said...

... continued from last comment

So those are Labour's options. To persuade them to go for power to vary a wider range of taxes, including income tax and business taxes, I would simply remind them of what infrastructure investment is for.

Governments (at least sensible ones) don't invest in infrastructure just for the sake of it. If they borrow, say, £500m to, say, provide superfast broadband to the whole of Wales including the less-populated regions, they will do it in order to get a return on that investment. That return will come from more people being able to set up businesses in less populated areas, or for businesses to move to those parts of Wales. The result will be that:

- These businesses will make profits, and the profits will be taxed.

- More people will be employed, and they and their employers will pay tax and national insurance.

- Fewer people will be out of work, therefore less will need to be spent on unemployment benefits.

All these things, taken together, provide a return on the investment. So it isn't necessary for a government to raise the rates of any taxes to pay for what they borrowed. If they do their sums right, what they gain in taxes and in not having to pay benefits will more than pay for what they originally borrowed.

But what if the Welsh Government does it? How on earth can the Welsh Government get any return on such an investment if income tax, national insurance, corporate tax and the responsibility for paying benefits rests, as it currently does, entirely with the Treasury in Westminster?

Labour are playing a mug's game if they agree to borrow money to fund infrastructure improvements, and to eventually pay back that borrowing themselves, when it is the Treasury in Westminster that will actually rake in nearly all the fiscal benefits of the Welsh Government's investment.

Not even Labour can be that stupid. They must have at least a degree of control over things like income tax, national insurance and business taxation in order for the return on the money they have invested to come back to them rather than go to the Treasury in Westminster. That is why Labour need to see sense and press for Wales to have a degree of control over a wide range of the taxes that really matter instead of just a few taxes that don't matter much at all.

Anonymous said...

I have every confidence that Labour in Wales *are* that stupid.

Anonymous said...

But do Labour really want borrowing powers? Or are they just using that as a reason to stop get tax responsibilty? They know that the treasuary sre not keen on grant any substansive borrowing powers to the devolved governments, especially Wales. So if Labour demand extensive borrowing powers to go along with any tax responsibilities they have a ready made excuse for refusing power over taxes.
I'm pretty sure Labour don't want power over borrowing as it would mean they have to spend the money wisely in order to get a return (and not piss it up against the wall as they've done with 3 rounds of European funding!!!).
Although as anon states above maybe there are some in Labour who are stupid enough to believe they can borrow money and not have to find a way to pay it back - maybe they think the treasuary will pick up the bill?


Welsh not British said...

Labour have already stated that thwy will never do anything positive for Wales if it means that we compete with England.

So whilst all these powers are a good thing they are ultimately wasted whilst Labour are in charge.

Mind you, instead of pointing out how poor the Labour government is all Plaid do is complain about the Tories. So I guess we deserve what we get.

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